What is wrong with outsourcing and how can you correct it?

What is wrong with outsourcing and how can you correct it?

In this day and age, there is no organisation that does not require outsourcing governance as a part of its operations. It could be critical or a support function, but outsource they all do.

What is intended to be a seamless transition of work and, in some case, part responsibility, in fact, becomes fraught with challenges. What should’ve been an easing of the load for the outsourcing organisation becomes a point of stress and could even lead to lower productivity because of duplication of effort or lack of harmony.

If you outsource your processes, you are probably already aware of the challenges that plague the relationship. Tick the issues your vendor management outsourcing team is struggling with.

Lack of visibility. If your vendor management team does not have real insight into the operations of the service provider, it is hard to predict the outcome of the engagement.

Lack of alignment. Are your vendor management team and the vendor on the same plane? Even the slightest mismatch in expectations could boomerang badly and cause delays and undesirable scenarios.

Absence of standard benchmarks. The lack of information makes it nearly impossible to draw a realistic comparison between teams, projects, and vendors. This makes choosing the right vendor a gamble of sorts.

Understaffed vendor management teams. Without the support of technology and streamlined processes, the vendor team is unable to efficiently utilise its team. The result is overworked and understaffed teams that cannot substantiate the validity of the data.

Lack of accountability in contracts. In a cost-centric outsourcing model, the vendor invariably finds an escape route and is absolved of all accountability when deadlines are missed.

Most of these challenges arise from the lack of accurate and objective data. Data, if any, that gets shared is historical in nature and has no play in accurately predicting the outcome of the project. Delays are inevitable, and all the customer can do is complain and push for faster completion. Vendor governance was never meant to be this difficult.

Is there an answer to this seemingly impossible conundrum?

Co-management is the key

With co-management, the customers and service providers come together to form a relationship that operates on complete transparency at an operational and strategic level between both sides. This must be supported by the right technical solutions which provide highly automated and accurate visibility into the vendor team’s performance. Instead of working on opposite sides, the customer and the vendor team need to work together to complete the project successfully.

Let us revisit each of the challenges listed earlier and understand how co-management can help address those concerns.

Lack of visibility

In more cases than not, vendors do not possess a robust governance plan. Any information that is collected is used internally and rarely shared with their customers. If they do, it is the project plan, current status, some output metrics, and timesheets. However, this data tends to be historical in nature and can’t be influenced. Customers get a feeling of progress, but there is no concrete impetus to drive continuous improvements in value creation and to ensure alignment with the real business goals.

What is required are tools and technology that give vendors access to real-time data that can be used to co-manage the team at many levels.

Time at work. Do you know how much time is spent for what purpose – project work, non-project work, time on PC, time in meetings, etc.? It has been shown that customers get around 35% less productive work time than they expect. An automatic time-tracking software can help customers use this data to drive transformation and help extract more value from the engagement.

Time on core activities. Important but non-core activities like time spent on emails and meetings eat into productive hours. By understanding how time is spent, this trend can be changed, and vendors can get 10-15% more time on core activities within the same working hours. This has a direct impact on output and helps customers derive more value from the association.

Work activity aligned with project plan. Real-time visibility can assure customers whether the activity taking place at that precise time is aligned (or not!) with the project plan.

Compare effort and output. Comparing effort and output together provides a powerful 360-degree view into individual or team performance. By putting a work output tracking system in place, customers get a powerful and holistic method to measure and improve productivity.

These above points work only if data and analytics are automated and accurate. It brings objectivity to review sessions, and ensures that both sides focus on improvements necessary rather than play the blame game.

Lack of alignment

Not having strong SLAs and metrics hinders the ability of vendor managers to ensure that service providers’ efforts and output are aligned with the business objectives of the customer.

Access to real-time data can be used to define SLAs and pay-for-performance models that will benefit both sides. The provider can now drive efficiencies while meeting customer goals. The customer pays based on results. If there is a gap, the real-time data provides advance notice and enables both sides to resolve any issues proactively.

Here are some examples of SLAs:

Work time. Set an expectation for the work time. Track the Daily Average at team level on monthly or quarterly basis. It should be within a +/- 10% band of (say) 8 hours of work time.

Time on core work. Out of the average eight hours of work, for example, six hours have to be spent on core activities.

Effort alignment with project plan. This is very dependent on the nature of work. This may not be very relevant in managed services, but for application engineering teams, goals can be set based on different phases of the project (waterfall model) or sprints (agile teams).

Output and effort correlation. Where output metrics are available, customers can correlate effort with output based on total work hours, time spent on core activities and activity patterns in various phases of the project.

Absence of standard benchmarks

In the absence of benchmarks, it is hard to compare between multiple teams, projects and vendors. This hampers the ability to negotiate and drive change.

One benchmark that can be used is the average per person work effort. Irrespective of the location, technology and nature of work, it is to be expected that teams are sufficiently engaged on productive work at all times. The ability to compare based on productive work effort provides much-needed insights into the most productive teams, locations, and work streams. Armed with this knowledge customers can decide the areas where additional work is possible or headcount increase is justified.

Team analytics. People analytics allows customers to analyse their outsourced team workload in any dimension such as the difference between top 20% and others, across roles, skills, locations, and so on. It is typical to discover that 20-30% of the team is fully engaged, while the rest of the team is not as busy. This is mostly due to poor delegation, and eventually impacts the team through higher attrition due to high stress (amongst the busy 20%) and not enough opportunities (from those less busy). Workforce analytics software makes invisible data visible, and the actions to be taken are obvious.

Vendor comparison. There is an increasing trend of periodic vendor review with the objective of reducing the vendor count or replacing under-performing ones. One uniform yardstick is the level of their team’s total work time and % time on core activities. Engaged and focused people usually mean a highly motivated team at the vendor and good workforce management and processes on the customer’s side.

Understaffed vendor management teams

Vendor governance is seen as a cost centre within the customer organisation. Typically the size of the team depends on the number of vendors and the outsourcing volume. Due to an over-reliance on manual and inefficient governance processes, vendor management teams tend to be very busy.

A lack of the right tools and governance process at the vendor organisation means data is coming in multiple formats from disparate sources, and it has to be combined and analysed. This takes a lot of effort, represents past performance and hence can rarely influence the immediate outcome. At best it provides some learning for future work, but that too is often not the case since the nature of work and vendor employees keep changing too.

A tool that can provide automated and objective data in a dashboard for easy consumption and review will reduce the load for vendor managers significantly. Integrating it with billing and project management tools will have an even bigger impact. The vendor managers can now focus on performance reviews, identifying problem areas, and taking corrective steps in a proactive manner.

Lack of accountability in contracts

Though customers demand accountability, it is a difficult promise to keep. This stems from an inability to create accurate baseline data based on which future goals can be set. In certain relationships, like managed services with quantifiable deliverables such as tickets resolved (or a similar equivalent), SLAs can be around the total volume of tickets and quality of resolution (turnaround time, end user satisfaction, etc). In others, like for application engineering, such metrics are a challenge. Schedule variance and quality of the deliverables are often used in such cases.

Yet, when the customer complains that SLAs are not met or delivery dates slip, or the quality was not as desired, this is inevitably disputed by the provider with all kinds of explanations. It is difficult to arrive at a firm conclusion, and hence typically both sides simply commit to doing better next time. Moreover, so this goes on, with the customer either making do with the value delivered by the provider and not knowing whether it can be better, or deciding at some point that they are better off with some other vendor.

This status quo can only be broken when the customer has access to automated outsourcing governance tools that provide accurate facts about the provider team’s effort and output (where practical). Then if the effort is inadequate, it can be corrected. If the output does not improve despite reasonable effort, the customer has the choice to switch to another vendor. The new vendor will have clear objectives from Day 1.

Many contracts are multi-year deals, with a commitment for year to year value improvements and/or cost reduction. The availability of automated operational data makes it possible to structure commitments and pricing to steady and measurable improvements in the baseline performance measured in the first few months of the relationship.

In today’s scenario of multiple vendors, a head-to-head comparison allows consolidation to the top two or three vendors. This ensures that you get the highest business value and lower governance overhead with fewer vendors to manage.

Summary

Outsourcing will continue to grow, and enterprises will keep leveraging it to gain cost and/or competitive advantages. Organisations that can move to a data-driven and proactive outsourcing governance model will continue to see increased value creation from outsourcing engagement and not suffer value erosion in outsourcing contracts.

Outsourcing governance teams have to push their vendors to collect and share data and information that helps them take actions to co-manage the engagement and not just ponder over historical data. Access to data and reports has to be real time and facilitate predictability of cost, deliverable, value and quality.

The advantages of the above recommendations, in a nutshell, are:

Customers can now track the service provider’s effort and predict the outcome.

Create new data-driven metrics and SLAs in the contract that align the teams and facilitate co-management.

Root cause analyses and course correction, if any, can be done in real-time and delays avoided. Nobody plays the blame game either.

Create competition among multiple vendors and score them against set metrics to see who brings more value.

A reward-based system is fair and lays the foundation for joint ownership of the project.

A leaner outsourcing governance team can still ensure continuous value creation for the organisation from outsourcing engagements.

It is time for outsourcing governance teams to move from contractual compliance audits to continuous value creation for the enterprise.